If Texas' deregulated electricity market is broken enough to need fixing — and that's debated — will it take a few drops of solder or a full-scale rewiring?

Texas power rates have increased 56 percent since 2000, and the state's electricity is among the most expensive in the country despite promises prices would go down when the state opened electric power to competition.

Many in the industry say the market is working, particularly for customers willing to shop for the best rates. Two of the state's top three political leaders, House Speaker Tom Craddick and Gov. Rick Perry, share that view.

"As other markets and states face population and electric usage increases, Texas' electric market will continue to prove the model for other states to emulate," Craddick said recently.

The third member of the state's top leadership, Lt. Gov. David Dewhurst, says the state's power markets need some tweaking to encourage greater competition.

"At the same time, I don't want to dramatically re-regulate the industry," Dewhurst said, without elaborating on what measures he believes might stimulate competition.

But some consumer groups and elected officials say the higher rates for residential customers — particularly the poorest Texans — require more drastic measures.

"Yes, you can put the genie back in the bottle," said Rep. Sylvester Turner, a Houston Democrat who is suggesting a return to price controls for residential and small business customers. "If you can deregulate, you can regulate."

Turner said the specific changes will depend on whether prices become more competitive by the next legislative session in January 2009.

Lacking the political will

A key component of deregulation in Texas and some other states was requiring the separation of power generation and retail sales. Many regulators now believe that hasn't benefited consumers, said David Reichman, chairman and CEO of RKS Research & Consulting, which conducted a recent national survey of utility commissioners.

It's doubtful there's enough political will in the state for massive revision to the deregulation phased in starting in 2002. Several bills aimed at modifying the system died during this year's legislative session, despite bipartisan support and public outcry about rates.

But there are a number of suggestions for ways the markets can be improved.

Many experts believe the real problems in Texas' system lie not in the retail market familiar to consumers but in the wholesale power system, where power plant operators sell their electricity.

Texas' wholesale market is set up so that the last power plant that ramps up to meet demand — called the marginal provider, and typically an older, costlier gas plant — effectively sets the prices for the whole market.

This occurs in what is called the "balancing market," a continuing process by which the Electric Reliability Council of Texas, operator of the state's power grid, buys small amounts of power to manage supply and demand throughout the state.

Generating entities submit bids, and the price ERCOT accepts tends to set the price for all sales. Because half of the state's electricity is generated with gas, bids by gas plants — now the highest-cost producers — dominate this process. This is particularly true during periods of high demand.

Critics say this system can be, and has been, manipulated by power producers.

William Hogan, research director of the Harvard Electricity Policy Group, said a better system for securing power during times of peak demand would be to allow ERCOT to determine wholesale rates. He said such a system wouldn't always result in lower prices but would be simpler and more open.

Geoffrey Gay, who has a utility law practice in Austin, said the wholesale market pays generators top prices, based on the cost of natural gas, for all their power, even when it comes from cheaper-to-operate coal and nuclear plants.

Public process

Legislation proposed but not passed this year would have restructured the wholesale market so that the highest-priced bid accepted by ERCOT wouldn't set the wholesale price. The bill would have required generators with coal and nuclear capacity to draw from those plants for at least 15 percent of their total sales and charge retail providers cost plus 10 percent.

But Paul MacAvoy, a Yale economist who has studied deregulation in various industries, says Texas would do well to leave its wholesale markets alone, because the system ensures a reliable supply of electricity.

"It's better to have more at a price that has cleared the market than to have half as much at a price that is considered fair," he said.

Robert McCullough, a Portland, Ore.-based consultant who has worked for power purchasers in ERCOT and other markets, said the wholesale market should be more public. Under ERCOT rules, the identities of the bidders in the balancing market are not revealed until 180 days later. Some bidders can also maintain anonymity by placing their bids through a third party.

"There's no way these secretive markets are getting prices that are the best out there, that you'd get in an open outcry auction," McCullough said. "You'd have to be burning Louis the 14th furniture in your power plant to justify the prices."

Making the identity of bidders and their prices public would moderate wholesale prices, McCullough argues, and that would moderate retail prices.

More directly related to retail rates is a proposal to modify rules involving aggregation — bulk purchase of electricity by a city or even the state, hoping to negotiate a better deal for a larger pool of customers.

That gives the city or state some control over prices and could even soften price spikes on days of peak energy usage, said Ken Rose, an independent consultant.

New Jersey already has such a system while Illinois has created a new state agency to negotiate the price of power for its residents.

Opt-out system

Texas' 1999 electric deregulation bill allows aggregation but says that residents must opt into the plan. The burden of signing up households one by one is so great that no cities have used their authority, said House Urban Affairs Chairman Kevin Bailey, D-Houston.

The committee passed a bill this year that would have allowed cities to buy bulk power for residents, who would have to use the city's selected provider unless they opted out.

Perry is concerned that an opt-out system "could be perceived by residential customers as government-sanctioned slamming," said spokeswoman Krista Moody. Slamming refers to aggressive marketing that changes customers to different providers without their knowledge or permission.

Another proposed revision that failed last session would have required the two largest retailers — Reliant Energy and TXU Energy — to add a certain number of customers from outside their traditional service areas or face financial penalties.

The bill additionally would have required those providers to switch customers to lower-cost plans. About a third of customers are still on the most expensive plans.

Reliant Energy, the retail descendant of the old Houston Lighting & Power, and TXU Energy, which served the Dallas area as TXU under regulation, started out with large customer bases because of their former monopoly status.

Jim Burke, CEO of TXU Energy, said his company is competing hard for new business.

"In September 2007 there were six offers available in North Texas, including one from TXU Energy, that were below 10 cents. In September 2001, while still regulated, TXU Energy was charging 10.13 cents," Burke said. ''That's a remarkable demonstration of the power of competition when one considers the six-year impact of inflation and the more than 100 percent increase in natural gas costs."

'Smart energy' solution

One obvious way to reduce bills is to use less electricity, and the industry is beginning to embrace "smart energy" systems that let customers better monitor and control power use, said Brian Landrum, chief operating officer of Reliant Energy.

Houston Mayor Bill White also advocates conservation because a small reduction in demand can keep the marginal power plant from cranking up and raising prices overall. He suggests the industry be allowed to get a moderate profit for successful efforts to get customers to cut usage.

"Success has traditionally been defined as increasing volumes, but we have to change that way of thinking and let there be as much value in a megawatt saved as a megawatt produced," White said.